An AB5 Primer

During a private ceremony on September 18th, California’s Governor Gavin Newsom signed Assembly Bill 5 (AB5) into law. AB5 has been framed as a “gig working bill” by state Democrats, most notably by State Assemblywoman Lorena Gonzalez, who proposed the bill. The bill aims to properly categorize workers, by making the legal distinction between employees and independent contractors.

Numerous groups successfully lobbied for exemptions under the new law, including lawyers, doctors, stockbrokers, accountants, travel agents, and graphic designers, just to name a few. Unfortunately for owner-operators, they were not among those granted exemptions under the new law. 

To understand why owner-operators are negatively impacted by AB5 requires an examination of a previous California Supreme Court Case. AB5 has codified and expanded the “ABC test” set forth in Dynamex Operations West, Inc. v. Superior Court. The test set forth by the California Supreme Court’s ruling is now used to determine whether workers in the state should be classified as employees or as independent contractors. 

The burden of proof lies with the employer, requiring them to meet all three conditions of the “ABC test” before they can classify a worker as an independent contractor.

  • The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact. (A)

  • The worker performs work that is outside the usual course of the hiring entity's business. (B)

  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. (C)

According to Michael S. Kun of the National Law Review, “practically speaking, factor (B) will likely be the most difficult for a company to establish. Without it, an individual will be considered the company’s employee, not an independent contractor.” Kun went further stating that, “...owner-operators of trucks may conclude that they now must shut down their businesses and sell off their assets, including trucks that they invested hundreds of thousands of dollars on.”

The California Trucking Association appears to agree with Kun’s grim assessment and has decided to file a federal lawsuit challenging the findings in the Dynamex case. Shawn Yadon, CEO of the California Trucking Association (CTA), was interviewed by Freight Waves two weeks ago, and framed the issue in this way:

AB5 could have been amended to address worker misclassification issues, as well as protect the 70,000 predominantly minority-owned truckers currently operating as independent contractors. There is no reason why protecting workers does not include defending the right of tens of thousands of drivers who have built their businesses around the independent owner-operator model, invested hundreds of thousands of dollars in their trucks and have operated their own businesses for decades.

The CTA’s lawsuit is primarily centered about the Federal Aviation Administration Authorization Act of 1994. The act prevents states from enacting laws that affected a motor carrier's prices, routes, and services. Furthermore, according to the CTA, the Dynamex decision imposes an impermissible burden on interstate commerce under the U.S. Constitution’s commerce clause. The legal posturing over AB5 also includes Uber, Lyft and DoorDash who have collectively already pledged to spend $90 million on a ballot initiative designed to effectively overturn AB5.  

If AB5 were to become law on Jan. 1st, as currently constituted, transportation experts believe that the entire industry would be impacted. "I think this is going to drastically change the way business is done in the state of California," said Chris Burroughs, Vice President of Government Affairs at the Transportation Intermediaries Association. Burroughs believes that “this is an issue that puts partisan politics aside, and it really comes down to what’s best for the state of California from a business perspective”  

AB5 has the potential to negatively impact owner-operators, carriers, and shippers by significantly reducing the number of available trucks on the road. The impact on both California and the freight industry as a whole is front of mind for Transfix CEO, Drew McElroy. “Our job as a marketplace is to aggregate capacity and provide ROI to our drivers and carriers. And we believe our platform does that better than anyone. My message would be if drivers, carriers or shippers are in a position where this new law is going to harm their businesses we’d love to help however we can. Our job, ultimately, is to offer fleet flexibility by offering businesses, both large and small, access to the kind of liquidity and opportunities they need to succeed,” said McElroy. 

For up-to-the-minute updates on AB5 and the CTA’s lawsuit, click here.

IndustryMichael CalabreseAB5